Chapter 5

Restatement

Second Position

Given the fact that only a handful of state supreme courts and legislatures had completely abolished the preexisting duty rule when the first Restatement of Contracts was being prepared in the 1920s, it is hardly surprising that the drafters elected to reaffirm the old rule in 1932.1 The drafters, led by Williston, might have pointed the way to modernization by adopting the impulse in the scattered reforms, as they did in converting nineteenth century cases of justifiable reliance on gratuitous promises into the broad principle of promissory estoppel, but they resisted departure from the entrenched preexisting duty rule defense.2 When a second crack at restating contract law was undertaken in the 1960s and 1970s, the restaters incorporated the expanding equitable exceptions for reliance and unanticipated circumstances, which were present in the caselaw in greater proportions than at the time of the first restatement, but they still did not see a sea change in the common law of contract law generally to justify total abrogation of Coke’s enduring dictum.

TENACIOUS RULE REAFFIRMED

Restatement Second Section 73 retained the preexisting duty rule except for the long recognized instances of a doubtful or disputed claim and a promise of a different performance.3 The Restatement Second was in fact stricter than the application of the classic preexisting duty rule on two counts. The restaters rejected the device of a novelty, when it was a mere ‘‘pretense of a bargain,’’4 and they likewise rejected the sometimes recognized fiction of a rescission coupled with a new agreement because its routine use, without adequately weighing fairness and voluntariness, could uphold ‘‘inequitable modifications.’’5 In another respect, however,

Section 73 was more lenient in allowing an ‘‘honest dispute’’ to qualify as an exception without demanding, as the first Restatement had, that it also be ‘‘reasonable.’’6 Overall, however, were it not for the soon-to-be- discussed Section 89 reforms, the Restatement Second position taken in Section 73 would have, ironically, actually barred more modification agreements than under the first Restatement by purging the law of the impurities of the traditional fictional bargain exceptions.

The rationale the restaters gave for reaffirming the preexisting duty rule was that contract modifications raised suspicions of duress, unconscionability and mistake, and the best way to render ‘‘unnecessary any inquiry into the existence of such an invalidating cause’’ was to refuse enforcement without fresh consideration.7 Thus, if averting duress is a higher goal than the parties’ realizing their adjusted consent, it would be illogical to ground relief on apparent consent or to permit the pretense of consideration in the form of a peppercorn.8

A different perception of the role of consideration in relation to coercion, suggested recently by an English justice, might encourage the finding of consideration in the absence of coercion: ‘‘The modern cases tend to depend more on the defense of duress in a commercial context rather than lack of consideration for the second agreement.’’9 The Missouri decision Rexite Casting Co. v. Midwest Mower Corp. (1954)10 provides an example of how consideration can be employed as a tool to avert suspected duress. A manufacturer of aluminum casting made a take-it-or-leave-it offer to modify its contract by raising the price 50%, due to a false claim of an increase in the cost of metal. The buyer protested but acquiesced since it was in the middle of production and didn’t have time to find the castings elsewhere. The modification smacked of coercion, but instead of struggling with whether the facts fell under the abstraction of economic duress, the court simply declared that consideration was absent.11 In this way a modern court can act as a chancellor in equity and find consideration lacking if the factual pattern raises a strong suspicion of coercion; but if the modification seems fair, the court can either find a benefit or a detriment or find an exceptional ground applicable.12 As an example of an exception, had the Rexite Casting Co. v. Midwest Mower Corp. modification been free of coercion and the claim of a price increase legitimate,13 the court could have pointed to the increase in the price of metal as an instance of the now recognized exception of an unanticipated change in circumstances.14 A more straightforward way would of course be to analyze whether there was a voluntary consensual transaction made in good faith, as is done under U.C.C. Section 2–209(1).

The application of Restatement Second Section 73’s general bar on contract modifications, and its attendant presumption of duress, will obviously dash the parties’ common intention more often than if the common law starts with the presumption that a consented-to modification is binding, subject to countervailing proof of coercion or bad faith. The

drafters of Section 73 were torn between a presumption of coercion and the acknowledged merit of enforcing the parties’ ‘‘equitable adjustment in the course of performance of a continuing contact.’’15 The recent opinion of an English justice on the subject of the preexisting duty rule and consideration might provide a guidepost for judges to work their way through this issue:

Consideration there must still be but in my judgement the courts nowadays should be more ready to find its existence so as to reflect the intention of the parties to the contract where the bargaining powers are not unequal and where the finding of consideration reflects the true intention of the parties.16

The drafters of Section 73 confessed in their schizophrenic Comment

(c) that there were criticisms to retaining the preexisting duty rule since it was based on ‘‘scholastic logic’’ and it did not admit the benefit of modifying an agreement by offering a ‘‘bonus to a recalcitrant promisor to induce performance without legal proceedings.’’ But then the Comment quickly retreated by adding that ‘‘an unscrupulous promisor may threaten breach in order to obtain such a bonus.’’17 The modern shift in common law approach in England announced in Williams v. Roffey Bros. & Nicholls (Contractors) Ltd. (1990)18 overcame the traditional reticence exhibited in Comment (c) to Section 73 by allowing realization of the parties’ intent, when coercion isn’t suggested, by finding consideration in the ‘‘commercial advantage to both sides’’ of continued performance of the contract.19

In Williams v. Roffey, a sub-contractor who had bid a job too low had little incentive to continue because continued performance placed him in mounting financial difficulty by increasing his losses. The general contractor felt motivated to offer more than originally agreed both because of a penalty clause for late completion in his separate contract with the owner and because of the commercial advantage to himself of finishing the project. No concern was expressed about coercion because the general contractor in fact offered to pay more in order to induce the disheartened sub-contractor to continue performance; so it wasn’t a case of the performer holding the other party up. In its rationale, the English Court of Appeal reaffirmed as good law the nineteenth century precedents of seamen being barred from recovery on a promise to pay more;20 but, unlike those cases, there was ‘‘some other consideration,’’21 to support the promise to pay the sub-contractor more, found in the benefit22 to the general contractor of securing himself commercially both by avoiding the penalty and by answering his obligations to the owner of completing the project without the hassle of finding another sub-contractor for more money.23 Despite the talk about receiving something extra, in avoiding costs and the penalty, this case comes very close to relegating the seamen’s wage

increase cases to the public policy arena of coerced price increases. Justices Russell and Purchas stated they saw consideration solely in the mutual benefit of continuation of contractual performance,24 something that could be found in almost any voluntary commercial contract modification.

At first glance, it might seem that the logic of Williams v. Roffey provided a comprehensive overhaul of Foakes v. Beer’s preexisting duty rule and consequently of the rule in Pinnel’s Case (1602). Amongst Commonwealth jurisdictions, an Australian court has come to this conclusion;25 but an English judicial reaction soon exhumed the pre–Foakes v. Beer dichotomy of Stilk v. Myrick’s modified promise to pay for contractual services and Pinnel’s modified promise to pay money. English judicial dictum in 1994 and in 1995 resisted extending Williams v. Roffey’s reform of Stilk v. Myrick– type modified promises to encompass modified promises to pay money; the English court preferred that Parliament consider the proposal, as if the rule in Pinnel’s Case was a Parliamentary mandate.26 In 1884, Foakes v. Beer brought together the two categories of modification promises represented in the seamen’s wage case Stilk v. Myrick and Pinnel’s Case, but the recent English decisions’ narrow reading of Williams v. Roffey atavistically resurrected the fragmented view prior to 1884. It is reminiscent of Denman, C. J’s reactionary resuscitation of a moribund, century-old application of the past consideration rule27 in order to largely smother Mansfield’s moral obligation reforms, as will be discussed in Chapter 8. Given this English judicial conservatism in the wake of the most electrifying common law contract departure in decades, a further narrowing of the impact of Williams v. Roffey could come in the form of restricting its applicability to modifications made on account of difficulties in performing contractual services precipitated by the eruption of unanticipated circumstances.28

Returning to the logic in Williams v. Roffey, the benefit found was not the bird-in-the-hand or the avoidance of collection costs,29 as has often been argued for unsuccessfully. Instead, the bargained-for benefit to the promisor–general contractor30 was the avoidance of costs and the continuation of timely performance. The sub-contractor’s continuation of performance, rather than cutting his business losses and breaching, provided the general contractor with the added, or different, benefit of continuation of contract performance in order to avoid the penalty and other commercial costs of complying with his obligations to the owner.

The approach followed by the English Court of Appeal is very similar to the solution to the preexisting duty rule conundrum devised by Massachusetts in Munroe v. Perkins (1830);31 indeed, if the English court was aware of the Massachusetts rule, and English courts were not so loath to reference American precedents, it surely would have been discussed in Williams v. Roffey.32 As in the English case, the contractor in Munroe v. Perkins had made a losing construction contract, not caused by unantici-